The changing shape of innovation
Illustration: Patrick Morales-Lee
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The changing shape of innovation

Jim Mortleman — May 2018

Open innovation pioneer Henry Chesbrough on how new co-creation models are fueling business success in the digital age.

• Fujitsu Forum Tokyo 2018 Speaker

Ever since his 2003 book Open Innovation: The New Imperative for Creating and Profiting from Technology posited a fresh framework for 21st-century business to find and leverage new ideas, Haas Business School professor Henry Chesbrough has been refining and extending his theories on collaborative business models to encompass not just the innovation of products but of services too. Now, 15 years and several books on, open innovation is being championed by a growing number of global businesses that believe the concept holds the key to successful digital transformation.

There are two types of business guru. First, there are the power-talking egos with a fondness for platitudes, whose rhetoric and illustrations frequently serve to distract their audience from an absence of insight. Then there’s a rarer breed: the ones who genuinely merit their management guru status, visionary thinkers with the ability to articulate transformative, inspiring business truths and back those up with compelling evidence and detailed research. Thinkers like Professor Henry Chesbrough.

The bookish, softly spoken 62-year-old is faculty director of the Garwood Center for Corporate Innovation at the Haas School of Business, part of the University of California, Berkeley. Although known for coining the term “open innovation,” Chesbrough certainly makes no claim on the invention of the concept itself. Rather, he acknowledges his work builds on and updates concepts that business theorists have been kicking around for several decades. The late Peter Drucker, for example, was promoting open organizational cultures and extended networks of knowledge-sharing as far back as the late 1950s.

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The reason Chesbrough’s work has become so pivotal in recent years is that as technology-driven disruption forces companies to rethink their business models and market approaches, it offers a solid framework for agile, sustainable business innovation. And it is a framework that both drives and draws upon the digital transformation strategies that so many organizations are striving to execute.

As with all the best theories, although there’s plenty of detail to delve into, the basic idea can be expressed in a single sentence. “It’s a way of companies doing innovation and R&D where they make much greater use of external ideas and technologies in their own business and, in turn, let their unused ideas be used by others,” Chesbrough says.
New pathways for innovation

Embracing that approach has required a change in mindset among many senior executives. “The old model of innovation was a closed model – think of a product development funnel, where ideas from a science and technology base are whittled down and taken to market. This is a classic technology push model. It worked very well for a long time in many industries but these days there’s too much useful knowledge available in too many areas all over the world to try to do everything yourself. In the open innovation model, there are many more pathways for ideas to come into the organization, not only from inside but also from the outside. And while some ideas may come to fruition inside the company, others can be taken to market in different ways – such as licensing to third parties, creating spin-offs or entering into joint ventures.”

“The fundamental premise of open innovation is not all the smart people work for you.”

When Chesbrough’s Open Innovation was first published it contrasted the traditional R&D approach with the more open models then being adopted by a handful of (predominantly technology) companies, such as Intel. “These companies bring in a lot of extra stuff to complement their internal R&D. They have built up an extensive set of programs to identify, recognize and then transfer external ideas – from universities, from start-ups and elsewhere. In turn they create platforms that others can build upon and take advantage of. In other words, they construct an ecosystem around their technologies,” Chesbrough outlined more than a decade ago. Back then the concept of ecosystems was alien to most large organizations. Now of course, they are widely understood as extended, networked communities of partners, suppliers, distributors, resellers, customers, researchers, developers, users and other stakeholders working collaboratively on shared technology platforms to help develop and bring new products and services to market.
Service economics

But the open innovation model is by no means restricted to the creation of products. “Many of the existing approaches to innovation emerged from business models focused in product-based or manufacturing-based thinking. We know much less about how to innovate in services even as advanced economies have increasingly become oriented around services,” Chesbrough said in 2010’s Open Service Innovation: Rethinking Your Business to Grow and Compete in a New Era.

Leveraging services innovation effectively is a challenging task that requires nothing less than a new approach to doing business. Even more so than with products, open service innovation requires a different mindset and a different stance towards business, customers, business models, and the ability and willingness to open up the innovation process.

That means embracing a set of new concepts:

  • Businesses must think of themselves as a services business first and foremost.
  • Innovators must engage with customers to co-create products and services. That will ensure innovations will always be of value to customers.
  • Companies should use the application of open innovation approaches to accelerate and deepen the innovation of their services and help turn their business into a platform around which an ecosystem of suppliers, customers, makers of complementary goods and services, and other third parties can develop and build specialization, variety and greater customer choice.
  • Companies adopting service innovation need to establish new business models that both profit from internal service innovation and stimulate external innovation activities. 

Chesbrough emphasizes that innovating in services is a more sustainable way to grow a business and fight off the pressures that companies face with the rapid commoditization of products. “There’s more value in creating the architecture that connects technologies in useful ways to solve real problems than there is in creating yet another technological building block,” he says. “Remember the fundamental premise of open innovation is not all the smart people work for you.”

By transforming products into platforms that incorporate internal and external innovation, and surrounding these platforms with a variety of value-added services, companies can obtain breathing space from relentless price and cost pressures,” he says. Moreover, as companies prepare for the next wave of technology-led disruption driven by AI, IoT and big data, they need to develop best practice capabilities in open service innovation.
Sharing innovation

Chesbrough’s ideas have been particularly popular with executives at larger and more mature businesses. That’s because they see open innovation as enabling them to tap into new areas and graft on the culture of fast-moving start-ups. But Chesbrough is also a hero to such executives because he speaks the language of traditional business and understands how they can best leverage their size and market position to exploit the new digital dynamics.

For example, he welcomes the rise of open source software as a way for organizations to build on others’ innovations without reinventing the wheel. However, unlike purist proponents of open source, he believes strongly in the need for companies to retain much of their intellectual property (IP) when participating in open innovation. Indeed, he believes a rock-solid understanding of ownership rights is essential for such collaborative innovation to be sustainable. “IP is not only allowed in my view of open innovation, it actually enables companies to collaborate and coordinate, confident in the knowledge that they will be able to enjoy some protection from direct imitation by others in the community,” he says.

82% report that open innovation is now practiced more intensively than three years ago — HAAS School of Business/Fraunhofer Institute for Industrial Engineering

The challenge for many companies is how to turn the core products and services into a platform – “a platform that, on the one hand, attracts others to build alongside and on top of it, but on the other hand allows them to provide a much wider set of [customer] experiences,” he told PwC’s strategy+business magazine. “A successful platform requires a business model that can inspire and motivate customers, developers and others to join in.”

A good example of a company driving such an approach is global ICT vendor Fujitsu, which created the Open Innovation Gateway in Silicon Valley in 2015 as a platform dedicated to advancing the implementation of innovative practices, based on collaboration among thought leaders and organizations from a wide range of fields.
Co-creating success

“By embracing open services innovation, you get the best external ideas joined to your best internal ideas and take those combinations to new markets,” says Chesbrough. “You can invest in deepening economies of scale to lower your costs while pursuing economies of scope to build stronger, more profitable relationships with your customers. By transforming your business model into a platform to make the most of services innovation, you can sustain your profitability and make it harder for your competitors to displace you.”

Co-creation is a particularly vital force for success in markets increasingly driven by digital. “Companies need to change the role of customers in the innovation process, involving them early and deeply in the co-creation of new products and services,” he says. The approach is hardly optional: the tacit knowledge that customers possess – about what would make a better product or where gaps exist for new products or services in a particular market – is something that can be shared for mutual benefit, he adds.

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More large companies are certainly applying Chesbrough’s thinking, many spurred by the pace of technological disruption and the need to fend off faster-moving competitors. One survey of large companies in North America and Europe by the Fraunhofer Institute found that about 80% are practicing at least some form of open innovation and witnessing growing management interest in and support for the approach.

Despite the increasing popularity of open innovation, companies need to be aware there can be significant barriers to introducing the model effectively. One challenge is obtaining buy-in from the organization’s service groups — such as legal, brand or procurement. “You really need to create new processes internally to collaborate with the external world,” Chesbrough told an Innovation Leader podcast.

He also highlights how many companies are built around closed ‘fiefdoms’ or ‘silos’ where one part of the organization acts independently and without knowledge of other group’s activities.

Today, though, an organization doesn’t have to be an industry giant to leverage digital assets and become more innovative. “In this age of big data, blockchain and machine learning, best practice in open innovation is increasingly being driven by digital transformation,” says Chesbrough. Indeed, the broadening of the innovation network may be the only way to build future business success.
First published May 2018
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